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Monday, September 11, 2017

A Taxing Problem: Own or Be Owned

We were going to talk about how a consumption tax
distorts consumption patters today, but we might get to that tomorrow.This is the good part about being “the Boss
of the Blog.”You can change your mind
at the last minute and still not get fired or anything. . . .

If you want to cut consumption, tax it.

Be that as it may, there is a rather loud chorus of
people who find what we say about an income tax being inherently more fair than
a consumption not merely presumptuous, but an outrage.It’s not because they disagree that an income
tax can be much more fair than a consumption tax.That’s not the problem.

What is the problem?They think all taxes should be abolished; “taxation is theft” seems to
be their mantra.

How, then, should the government get the money it needs to
function?They have the answer: the
government should just issue the money it needs, debt and interest free, and
spend it into circulation.

There are some serious conceptual errors about money in
that proposal, but we’re not going to address them — today.Instead, we’re going to look briefly at the
politics of taxation.

One of the slogans going around right before the American
Revolution was “No taxation without representation!”The colonies had neither appointed nor
elected representatives in parliament to vote yea or nay on the taxes levied on
the colonies.The colonial governors had
no power to levy taxes, only the responsibility of collecting them.The colonial legislatures similarly had no
power to do anything.The imperial
parliament in London had all the power, although poor old George III got all
the blame for it.

Poor George III: more of a puppet than a tyrant.

And why did the parliament have all the power?Because they controlled taxation.George III had more than enough money of his
own to run the royal establishment (although his son, George IV, was a
spendthrift and had to be bailed out by parliament), but pay the army and the
navy?No way.

Whoever controls the purse strings controls the
government.Want to know how so many
whacky ideas get adopted by governments?Because taxpayers aren’t supplying the bulk of government financing
anymore.It comes from issuing
government debt . . . that never seems to get repaid. . . .

That means that the people who purchase the debt and
provide the financing for government are the ones who usually get listened to,
not the taxpayer.And as more and more
voters become dependent on government one way or another, they are going to
vote for the people who will secure them the most benefits, rather than the
politicians running on the platform of who will do what is best for the
country.

So why is a consumption tax worse than an income tax when
it comes to trying to keep the politicians under control?For one thing, people will tend to vote for
politicians who promise to make the exemption bigger, rather than the tax rates
lower.Rather than the politicians going
to the people for money, the people go to the politicians for money.That’s bad.

It is also unlikely, despite all the rosy promises, that
a consumption tax is going to generate sufficient revenue, and the politicians
will fall back on debt.Look at the
numbers:

The trap of national bankruptcy.

Assume a federal budget of $4 trillion, a population of
400 million, and GDP of $12 trillion.These figures are just for illustration, by the way, and are not
intended to be realistic, just plausible for the sake of the example.

In order to meet the $4 trillion budget, the government
will have to collect $8 trillion in taxes out of a GDP of $12 trillion.How so, you ask?If everybody gets $10,000 of taxes back, the
$10,000 first has to be paid, and $400 million times $10,000 = $4 trillion,
which added to the amount needed to fund government is $8 trillion.

Problem.It is
almost impossible to sustain tax collections in excess of 20% of GDP.It can be done for a short time in an emergency,
but it won’t last.That means that a $12
trillion GDP will result in tax collections of $2.4 trillion.And the rest?Debt financing, another problem.

In order, then, to have enough money to run the
government out of a consumption tax that promises to rebate $10,000 to everyone,
the government is going to have to issue new debt each year in the amount of
$5.6 trillion, or more than the total federal budget.And we didn’t even get to state and local
government needs.

Is there an alternative?Definitely: an aggressive program of expanded capital ownership whereby
actual people acquire capital ownership that takes care of their basic needs,
cutting out the three-quarters of the federal budget that covers entitlements
and transfer payments.For the rest,
form for-profit corporations to take care of infrastructure and land and
natural resource development, charging user fees instead of taxes, and getting
profits from development that are distributed to actual people instead of to
the State or go into the pockets of politicians.

The cost of government — and control over people’s lives
— would be reduced to a minimum.A
reformed income tax system that is used solely to raise the money to run
government would be much easier to administer and certainly more fair than a
consumption tax.

And one more thing: a consumption tax reduces consumption
. . . and that means it takes away the incentive for growth.But we’ll look at that tomorrow.